The dollar will collapse under a ballooning US deficit and deglobalization, former Morgan Stanley Asia chairman says
- The US dollar will almost certainly crash under the weight of unprecedented government debt and a reversal of decades-long globalization trends, Stephen Roach, former chairman at Morgan Stanley Asia, said Monday.
- The currency initially soared as investors piled into safe-haven assets at the start of the coronavirus pandemic.
- Yet the dollar has fallen under new pressures in recent weeks. The likelihood of rates remaining near zero for years, coupled with heavy government borrowing, exacerbate "significant macro imbalances" and stand to pull the currency from its pedestal, Roach told CNBC.
- A move away from global supply chains will add fuel to the fire "as we import more higher-cost foreign goods from overseas," he added.
- Watch the US Dollar Index update live here.
The US dollar's dominance faces major threats as the post-pandemic global economy emerges, Stephen Roach, former chairman at Morgan Stanley Asia, said Monday.
The currency's strength survived attacks from President Donald Trump, a trade war, and the start of the coronavirus outbreak. Yet its winning streak has faded in recent weeks as investors prepare for record borrowing to fund trillions of fiscal and monetary stimulus. A sinking national savings rate also stands to drag on the dollar, Roach told CNBC's "Trading Nation."
"The US economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit," he said. "These problems are going to go from bad to worse as we blow out the fiscal deficit in the years ahead."
Looming shifts in the global manufacturing industry will create a more long-term pressure on the currency, the Yale University senior fellow added. Several experts project the US will promote domestic production and move away from increasingly complex supply chains. Roach sees such a transition taking place over the next couple of years and sealing the dollar's fate.
"Generally, it's a negative implication for US financial assets," he said. "It points to the probability of higher inflation as we import more higher-cost foreign goods from overseas, and that's negative for interest rates."
The problem could even be too big for a separate administration to solve, Roach added. The Treasury Department announced in early May it plans to borrow $3 trillion in the second quarter alone to foot virus-relief bills. The swelling budget deficit will plague US lawmakers for years as interest payments stack up and stifle a near-term rebound for the dollar's strength, Roach said.
Those balancing the nation's budget "have never had to deal with anything close to this disruption," he added.
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